US State Debt Stands at $4.19 Trillion, Pensions Largely to Blame

Total US state debt stands at more than $4 trillion, with public pensions accounting for nearly $3 trillion of the total amount, according to a report by State Budget Solutions (SBS).

(August 28, 2012) — Budget debt among America’s 50 state governments stand at a hefty $4.19 trillion, including outstanding bonds, unfunded pension commitments and budget gaps, according to a new report by State Budget Solutions (SBS), a nonprofit organization.

Of that amount, public pensions account for $2.9 trillion, the group, which advocates for reform of state budgets, alleges.

“States need to stop using fallacious government accounting standards,” Bob Williams, president of SBS, told aiCIO. “They can assume 7-8% on an investment after putting more money into high-rate securities. It’s so speculative.”

Pension officials acknowledge return targets must be lowered but also claim that a one-year horizon is not nearly enough to judge portfolio performance. Late last month, for example, Illinois’ largest public pension fund, the $37 billion Teachers’ Retirement System (TRS), revealed that it is considering dropping its assumed rate of investment return from 8.5% to between 8.25% and 7.75%, based on advice from its actuary. “This is one of the most important decisions the board will make,” said Dick Ingram, TRS’ executive director. “Our members and the board should have the benefit of other opinions and analysis before making a key decision that affects the next five years. The more conversations there are the better off we are.”

Meanwhile, according to Williams, pension managers have been allocating an increasing amount of money into more risky investments, asserting that they will guarantee higher returns, and thus legislators have not contributed an adequate amount to fund state schemes. “Because of the refusal to look at reality, we haven’t gotten the change we need,” Williams said, explaining that market-based as opposed to government-based accounting would be a step in the right direction.

“Under government accounting, you can assume whatever rate of return you want,” Williams asserted.

SBS’ report, which takes into account all state debt and future spending obligations, found that California had the largest debt with more than $617 billion, while Vermont, North Dakota, and South Dakota were among the states with the smallest debt.

“These budget numbers should serve as a wake up call for every state legislature around the country. Our states are in trouble and no amount of budget gimmicks, political posturing or hiding bills will fix the massive debt that they face,” Williams continued in a statement. “There is no option for status quo or incremental adjustments. Drastic reforms, innovations and political courage are needed to put our states back on the road to fiscal survival.”

According to the report, although New York and Texas moved up one and two spots, respectively, from last year, the states with the five largest debts remained unchanged from 2011 findings. Overall, California leads the nation with largest total debt followed by New York ($300 billion), Texas ($286 billion), New Jersey ($282 billion), and Illinois ($271 billion), respectively. States with the lowest debt were Vermont ($5.8 billion), North Dakota ($6.1 billion), South Dakota ($6.5 billion), Wyoming ($6.9 billion) and Nebraska ($7.8 billion).